Wednesday, July 31, 2013

"...If the UK FCA financial crime supervision team deals with around 100 cases a year of "ML risk &/or serious weaknesses in firms’ AML controls" why have there been so few enforcement actions..?"

Timon Molloy, editor
of Money Laundering Bulletin has asked this question on his website, and I will
try and provide one interpretation.

When we examine the
way in which the anti-money laundering regime has been implemented, it is very
clear that since its very first beginnings, no-one has ever bothered to take
ownership for its overall implementation and administration.

From the passing of
the first Act in 1994, no-one stepped forward to accept the responsibility for
ensuring that the rules and regulations were enforced.

The important thing
to remember about the AML laws is that they are composed of two distinct but
parallel sets of provisions.

First, there are the
laws themselves, which define what a person or an institution can and cannot do
with regard to the handling of criminal money.

These laws did not
cause too many difficulties in most cases, because they were enforced by the
police and the relevant criminal justice authorities, the Crown Prosecution
Service, the Director of Public Prosecutions, and the Customs and Revenue
Authorities.

But, at the same
time, there existed a set of Regulations, which set out how institutions should
conduct themselves and what they needed to do to ensure 'best practice' compliance
with the laws.

Any failure to
comply with the important inner core set of the Regulations carried penal sanctions
and were criminal offences, and it was these provisions that were the key to
ensuring a standard of 'best practice' was implemented and adhered to.

The two sets of
legal requirements ran in tandem with each other, and the aim of the
Regulations was to impose a unified standard of conduct which could be adopted
to ensure a seamless level of national compliance.

One of the biggest
problems associated with the anti-money laundering legislation was the
provision which required a person to disclose to the relevant lawful authority
(the police in the UK in the relevant criminal intelligence agency), and
suspicion they might have that the money they were handing might have come from
a criminal origin.

There were a series
of sensible regulations which existed to help institutions ensure a practicable
response to this requirement, and the Government had every confidence that the
law would be complied with in a sensible and practicable manner.

They had every right
to make this assumption, because for years, the banks had been telling the law
enforcement authorities that they would have loved to share sensitive information
with the police, except that the civil law on client confidentiality prevented
them from providing the police with any information at all.

The provisions of disclosure
of suspicions were implemented specifically and deliberately to help the banks
get over this concern, and they provided the banks with a specific defence to
being sued for breach of confidentiality, where they made a bona-fide
disclosure of their suspicions to the police.

What no-one had
foreseen was that the banks had been telling lies all the time, and had
absolutely no desire or intention of ever passing any incriminating evidence to
the police under any circumstances.

Within a few months
of the new anti-money laundering regime having been introduced, the
battle-lines between the law enforcement agencies and the financial sector had
already been firmly drawn in the sand. The concerns centered around the meaning
of the three words ‘suspicious’, ‘transaction’ and ‘disclosure’.

Put at its simplest,
the dispute arose around the number of suspicious disclosures that were being
made by the regulated sector to the police, and in return, the quality of
‘feed-back’ which was largely not being provided by the police intelligence
agency in return.

There was a
considerable degree of misunderstanding among both the financial sector as well
as the public as to the nature of the responsibilities under the legislation,
for reporting suspicious transactions.

The police began to
become concerned at the paucity of the level of disclosures being made to them,
and the word began to spread among the law enforcement agencies that the
financial sector weren’t really taking the problem of disclosure as seriously
as they should.

It was also becoming
much clearer that one of the reasons behind the lack of urgency seemingly being
expressed by the financial sector was that no-one among the financial
regulatory sector appeared to be willing to take on board the responsibility to
grasp the nettle of ensuring compliance with the Money Laundering Regulations,
or indeed, check, during a routine compliance visit, what their regulated
members were doing with regard to the anti-money laundering law. The law, to
all intents and purposes, was being routinely flouted, by both the vast
majority of the regulated sector, and routinely ignored by their regulators.

In a report I wrote
for the UK’s contribution to the Financial Action Task Force’s annual
methodology report in 1998, I reported a series of quotations from City
individuals I had interviewed for the purposes of gathering background information
for the document. Their observations were quite clear, and throughout my
interviews, the same phrases kept re-appearing from those I interviewed.

‘I can’t remember
anyone asking me to show them any evidence of my client identification
procedures. It’s as if they don’t want to know’! (Futures trader with small
specialist broking company).

‘I think if somebody
went to prison, we’d all sit up and take notice. But the fact is that nobody
wants to see London lose its place in the world market, and they certainly
aren’t going to start worrying about a bit of funny Russian money coming in’! (
LIFFE floor trader).

‘I do ask to see evidence
of client identification, but if I am told that the introducing broker has done
his homework, as long as someone is happy to sign off on that, then it's none
of my concern. I don't get paid to turn away business'’ (Medium-sized broker’s
compliance officer).

‘If the regulators
started getting heavy with us about the regs, we’d comply a bit better. Not a
lot though, because they are all crap! As it is, SFA don’t give a damn! They
never ask to see the paperwork, all they care about is seeing the right signatures
on the right forms. Most of them are so dumb, they wouldn’t know what they were
looking at, anyway’. (Young desk trader in a busy futures’ dealing operation).

‘Of course I am
laundering money. I’ve got to be. Nobody does these kinds of trades in this
time scale, and at these volumes, and loses as much money as some of these guys
do, without having a reason for doing it. Anyone can get on the wrong end of a
trade, from time to time, but you make damn sure you don’t make the same
mistake again. These guys are just moving around huge sums of other people’s
cash, and they are willing to pay for the privilege’. (Forex dealer in a small
private client firm).

‘Look, if anyone
asks me, I’ll deny I said this to you on a stack of bibles, but what do you think
we do for a living. Someone wants to move some money, and I am there to help
them. It doesn’t happen all the time, most times we’re just taking positions.
Anyway, all this stuff you are asking cannot be that important, even the
regulators don’t ask about it’. (Same Forex dealer)

What became
abundantly clear in the interviews was that there was a general acceptance that
the Money Laundering Regulations were not only not being enforced, but that
those with responsibility for their regulation, the Securities and Futures Association,
did not seem to care about their enforcement.

Whether or not the
SFA accepted that it did have regulatory responsibility for the enforcement of
the provisions of the Money Laundering Regulations, the market and those it
regulated in other areas believed it had such a responsibility!

Nevertheless, it
became clearer that the lack of regulatory oversight had become a major issue,
as far as guaranteeing ‘best practice’ was concerned, and the putative new
regulator, the Financial Services Authority (FSA), was required by government
to take on board the need to develop a new approach towards the regulation of
this area of the market. But it took the fallout from the General Abacha affair
to make the London market and those who regulated it to realise that the level
of anti-money laundering compliance had been allowed to become derisory.

In an article I
published in Money Laundering Bulletin in April 2001 entitled “Too Little – Too
Late” – ‘The FSA’s response to the Abacha looting’, I reported;

‘…The FSA identified
42 personal and business bank accounts in the UK linked to the Abachas. These
were held at 23 banks, including UK banks and London branches of foreign banks.
The regulator said it had ordered seven banks to tighten their controls or face
unlimited fines and public naming later this year when the regulator is given
new powers to tackle money laundering…’

Extracted from the
front page article of the Financial Times of 9th March 2001, these words
demonstrated more clearly than anything else how and why the parlous state of
non-compliance with the Money Laundering Regulations had been allowed to get to
the state it had in the UK by the new millennium.

When the Abacha
state looting story first broke, the immediate response of the UK authorities
was to drag their heels and to look for every possible excuse to undertake a
damage-limitation operation. In a typical financial establishment response to a
whiff of scandal, the usual apologists were wheeled out to claim that the City
of London was one of the cleanest financial centres in which to do business.

The FSA was finally
persuaded to mount an investigation, although their immediate response, and
without examining the full facts, was to opine that the amount of money under
suspicion was not as great as others claimed, an illuminating illustration of
an intention to mount a fearless and searching investigation.

Finally we had the
findings of the FSA’s researches, and a very sorry tale they told. The
regulator had established that a number of UK banks had failed to comply with
the following requirements when opening accounts.

Overseeing the
opening of accounts by higher risk customers

Verifying the
identity of beneficial owners of companies

Finding out the
source of customer’s wealth

Following guidelines
on the reporting of suspicious transactions

Setting up adequate
record retrieval and retention systems

Avoiding over
reliance on introductions by existing clients.

This state of
affairs then continued throughout the FSA's stewardship of the financial
sector. What marked out their regime of control was a concerted unwillingness
to take any responsibility for ensuring that the Money Laundering Regulations
were properly enforced and supervised.

So now, the new
Financial Conduct Authority finally has a defined policy requirement to
implement the Money Laundering Regulations.

In their Annual Report
for 2013, they state;

"...The
Financial Services Authority (FSA) had a statutory objective to reduce the
extent to which it was possible for a financial business to be used for
financial crime. We do not have a freestanding objective to reduce financial
crime, but reducing the extent to which firms can be used for financial crime
is a priority as part of our objective to enhance the integrity of the UK financial
system. All firms authorised under FSMA are required to take steps to reduce
the risk that they may be used for financial crime..."

That may be all very well, but these are very specific weasel words designed to obfuscate and to disguise the real end-product of their regulatory ambitions which is to do a lot of talking and report writing and chatting to other regulators in sunny palm-fringed jurisdictions, while not doing very much to enforce the law, which they appear to be saying is not their objective.

They hope to achieve
this, so they say, by the use of specialist teams;

"...The
specialist supervision team supports the firm supervisors in a number of ways.
Some of this work is highly resource-intensive, while other issues need much
less specialist input. The types of specialist support include:

• Conducting Systematic Anti-Money
Laundering Programme (SAMLP) assessments of major banks. The SAMLP has been running
since early 2012 and currently covers 14 major retail and investment banks
operating in the UK. These reviews are intrusive, involving detailed testing
and extensive interviewing of key staff responsible for the bank’s business, for
implementing anti-money laundering processes and for AML controls. We often
visit branches, as well as the operations of UK-incorporated firms outside the
EEA, where they are required to operate UK-equivalent AML standards. We have so
far assessed and visited five UK banks and conducted overseas work in
Switzerland, Singapore and India for three of them.

• Carrying out thematic reviews on
high risk issues, assessing around 20 firms each time.

We usually publish
these reviews, assessing how well firms in general identify and mitigate the
money laundering risks they face, as well as guidance on good and poor
practice. Our recent thematic work on AML includes: Banks’ management of high
money laundering risk situations (June 2011); Banks’ defences against
investment fraud (June 2012); and Banks’ control of financial crime risks in
trade finance (July 2013). In addition, we are due to publish a review of AML
and anti-bribery and corruption controls in asset management firms later this
summer.

• Assisting with the financial crime
aspects of firm risk assessments carried out by firm supervisors..."

If anti-money
laundering requirements are going to be effectively enforced then all this talk
of thematic reviews and SAMLP assessments, and swanning around in foreign countries will pale into insignificance, when
set against the willingness of the FCA to bring positive criminal action
against those institutions which fail to comply with legal requirements. That will be the acid test, but don't hold your breath, there is too much waffle in this report to give any comfort that they will actually grasp the nettle and prosecute for wilful failure to comply with the law.

As we have already
seen with HSBC, the banks took a positive business case decision to ignore the
realities of the AML laws and Regulations, no-one was prosecuted for the bank's
wholesale money laundering operations for the Mexican drug mafias; and my own
experiences as a consultant have confirmed the degree of contempt in which the
AML regime is held by bankers.

There has never been
any stomach for undertaking any formal positive law enforcement action against
the banks in this area of operation, and it looks very much as if the same
attitude still prevails.

Guess what? This is exactly what large companies are paying me for. They need to know what their average customer needs and wants. So large companies pay millions of dollars per month to the average person. In return, the average person, like myself, participates in surveys and gives them their opinion.

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!